Any correspondence from the IRS, regardless of its nature, is a harrowing experience. Never has the IRS put good news in a letter and sent it to a taxpayer. The good news is that there is always a solution, and the first step when receiving a letter from the IRS is to take a deep breath and know that you have options.
Understanding the Various Types of Letters from the IRS
It must be noted that the IRS has as many letters and names for letters as there are grains of sand on the beach. Each letter, though, is designed to accomplish a specific task and will inform you, the taxpayer, of your rights in any given situation.
- Audit Letter – The IRS initiates an audit, whether in person or by correspondence with a certified letter, never by phone.
- 30-Day Letter – Officially known as Letter 525. Informs you of your tax due, and it is your ticket to IRS Appeals
- 60-Day Letter – Not an official letter but more of a friendly reminder that a 30-Day Letter was sent to you.
- 90-Day Letter – Officially known as Letter 531 or Statutory Notice of Deficiency. This letter further explains the tax you owe, and it is your ticket to the Tax Court.
- Final Notice Letter – Officially known as Letter 1058. This is your last chance to pay the taxes the IRS says you owe before collection ensues. This is also your ticket to a Collection and Due Process (CDP) hearing.
- Notice of Filing a Federal Tax Lien – Officially known as Letter 3172. This letter is sent to inform you that a Federal Tax Lien has been filed against you and notifies all future creditors that you have an outstanding tax debt.
- Notice of Intent to Levy – Officially known as Letter 11. This letter is your last chance to pay before the IRS takes your stuff.
The Initial Audit Letter
Perhaps the most frightening of all letters is an audit letter informing you that you have won the IRS lottery and been selected for an audit, which can be done either by mail or in person. A lot has been written about how the IRS selects people for an audit. The story that is often told about the IRS Chief Counsel is that there is a vault buried deep below the earth in an IRS processing facility that contains a notebook where a differential equation is written. And they use this equation to determine who gets audited. No single person knows the equation, but instead, they know a part of it. Another way the IRS decides on an audit is by reading the newspapers to see who got in trouble for various reasons that likely have tax consequences. IRS also initiates audits based on information they receive from ex-spouses, ex-girlfriends and boyfriends, and ex-businesses associates. The temptation for jilted ex-lovers and business partners to inform the IRS is simply too much at times, and once the cat is out of the bag, there is no going back.
You Received a Letter, Now What?
The first thing you should do is read the letter to determine what the IRS is requesting of you. It may be as simple as providing additional documentation to support a position taken by you on your tax return. For example, the IRS could ask you to provide a copy of a check you used to pay a large expense that you claimed as a deduction.
The important thing to note at this point is that the IRS has not made any decision regarding your tax return. It has merely been selected for further consideration, and it likely has nothing to do with you personally. Your tax return was randomly selected for review, and you must cooperate the same way you do in any other uncomfortable situation, such as when you are pulled over for speeding or selected for an enhanced security screening at the airport. Of course, you are entitled to representation at this point by a qualified tax attorney.
The Audit is Over, What Happens Next?
Following the audit, IRS may send you a 30-Day Letter. This is not its official name, but rather, it is commonly referred to as the 30-Day Letter because you have thirty days to respond to it. Specifically, Letter 525 is the generic 30-Day Letter that follows an audit and outlines IRS’s proposed adjustments or changes to your tax return.
For example, the IRS may disagree with some of your deductions or how you characterized income (active vs. passive). Oftentimes, these adjustments or changes will result in an increase in your tax liability, which means you owe IRS money. You have two options with this letter. You can agree to the adjustments or changes and pay the additional taxes that the IRS claims you owe, or you can disagree and request a meeting with the examiner’s manager. The examiner is the person who examined your tax return and determined that you owe more money.
Also, and perhaps more importantly, you can request a hearing with IRS Appeals. The actual letter will tell you how to do this. Essentially, you write a written request to the Appeals Office, noted in the letter, saying who you are and why you disagree with the examiner’s findings.
What are IRS Appeals, and won’t they just agree with the Examiner’s findings?
IRS Appeals is an independent body from the IRS. Their mission is to resolve controversies without litigation on a basis that is both fair to the government and to the taxpayer in such a way that will enhance voluntary compliance and the overall efficiency of the IRS. These are lofty goals, but the important thing to note is that the Appeals Officer is independent of the person saying you owe tax, and it is possible that the Appeals Officer will agree with you and tell the examiner to go jump in a lake. Probably not in those words, but it happens all the time.
Once you file an appeal, it takes about 45 days or so for them to respond, and they will send you a letter to schedule an informal conference to review your situation. It is not like a court because the Appeals Officers are not judges.
At the conference, the Appeals Officer will review your file, consider your arguments and those from the IRS, and will make an independent decision. They can rule in the IRS’s favor, your favor, or suggest a compromise. For example, the Appeals Officer may recommend a settlement where you are required to pay only a percentage of the tax that the examiner said you owe. It is hard to predict what will happen because each case has different facts and circumstances that must be analyzed individually.
If you convince the Appeals Officer that you are correct, then everything is over. The Appeals Officer will agree with you, and you will no longer have to pay the extra tax that the examiner says you owe. It is similar to having the IRS’s mother tell them to back down and leave you alone. You may also accept a compromise offer then once you pay the new bill, the whole situation goes away. However, if the Appeals Officer agrees with the IRS, you have two options. The first is to pay what the examiner says you owe, and the second option is to file a petition in Tax Court.
You may choose to have a lawyer with you in the Appeals process. This is often a good idea because tax lawyers are often very familiar with the inner workings of the IRS and can provide you with peace of mind and sound legal arguments. Alternatively, you may represent yourself in the Appeals Process. The important point to note whether you hire a lawyer or not is that you have 30 Days from the time you receive the Letter 525 or the 30-Day Letter, as it is commonly known to request your hearing before IRS Appeals. If you wait too long, you will lose that opportunity.
I forgot to respond to the 30-Day Letter, what do I do?
If you wait longer than thirty days or you lose your appeal, you will receive another letter from the IRS. This letter is called the 90-Day Letter or the Letter 531. This is also known as a Stat Notice or a Statutory Notice of Deficiency. This letter further explains the additional tax that the IRS claims you owe and provides you an opportunity to go to Tax Court and have your case heard before a Tax Judge.
What Exactly is the Tax Court?
U.S. Tax Court is a little different from the normal courts you may be familiar with. For example, there are no juries, and the only types of cases heard by the Court are cases filed by taxpayers against the IRS. The judges are literal tax experts, and they only ever hear one type of case.
This is because the Tax Court is a court of limited jurisdiction. It is what is known as an Article I court, a court created by Congress possessing only the limited powers given to them by Congress. The typical Federal Court that you may be familiar with either from television or your own experience is an Article III court, a court created by the Constitution possessing all the plenary powers you think about when you think about courts and judges (e.g., power over a person’s liberty). Tax Court cases can often be completed by motions and briefs, and you personally may never even see the judge. They have an interest in expediency, and since they are completely independent of the IRS, they are under no obligation to agree with them. If your case is strong, then they will rule in your favor.
Alternatively, if you do not file a petition with the Tax Court, you can still have your day in court. This time, it is the Federal District Court. This is an Article III court and possesses all the powers of courts that you normally associate with them. However, in order to be heard in District Court, you must first pay the tax that the IRS says you owe and then sue the IRS for a refund. This does not have to happen immediately. Once you pay the bill, you have three years from the date the return was filed or two years from the date you paid the tax, whichever is later, to sue for a refund.
Regardless of the decision you make, whether it is to pay the proposed tax, request a hearing before IRS Appeals, or petition the Tax Court, it is very important that you do not ignore the IRS’s letters. The clock starts ticking the moment you receive them, and if you fail to act or respond, you are setting yourself up for collection actions. This is when the IRS assesses your tax, files a tax lien against your property, and then begins collection efforts against your assets in order to pay the tax the examiner claims you owe. Additionally, you are free to hire a tax attorney to help you at any stage of the process, whether it is the initial audit letter, the 30-Day Letter, or the 90-Day Letter.
How in the world do I pay these extra taxes when I don’t have any money?
At any point in the process detailed above, if you decide it is just too much and too stressful and you just want to make the IRS go away, then you can simply pay the taxes they say you owe. This is all fine and good, but not everyone can afford to cut a large check and send it to the IRS. There are a number of options for paying off your tax debt that an experienced tax attorney can help you procure.
- Offer in Compromise – This allows you to pay your tax debt for less than the money you owe. Not everyone qualifies for this, but if you do, you can be debt-free for less than what you owe.
- Installment Plan – This is an agreement between the taxpayer and the IRS for the taxpayer to pay off the tax debt over a period of time. It is very similar to paying a mortgage or car payment.
- Fresh Start Program – Offers a faster approach to qualifying taxpayers to pay off their tax debt without worrying about a Federal Tax Lien attaching to any of the taxpayer’s property.
Conclusion, so what do I do?
As discussed, the first thing you should do is read whatever correspondence the IRS has sent you. Do not, no matter how tempting, throw it in the trash. IRS is not someone you can ignore or ghost in the hopes that they will get the message and just leave you alone.
Your second step should be to not panic and remember that there is always a solution. If you want help and peace of mind, then you should contact a qualified business lawyer to help you through this process. The Law Offices of Brenton C. McWilliams will deal with the IRS, so you don’t have to.
Contact us today to schedule a consultation and discuss your options.